Recommendations of the Committee on Financial Inclusion

The following is the Summary of the recommendations of the Committee on Financial Inclusion which were released to the media by its Chairman, Dr. C. Rangarajan, in Mumbai today !ccess to finance by the "oor and #ulnerable grou"s is a "rere$uisite for "o#erty reduction and social cohesion. This has to become an integral "art of our efforts to "romote inclusi#e growth. In fact, "ro#iding access to finance is a form of em"owerment of the #ulnerable grou"s. Financial inclusion denotes deli#ery of financial ser#ices at an affordable cost to the #ast sections of the disad#antaged and low%income grou"s. The #arious financial ser#ices include credit, sa#ings, insurance and "ayments and remittance facilities. The objecti#e of financial inclusion is to e&tend the sco"e of acti#ities of the organi'ed financial system to include within its ambit "eo"le with low incomes. Through graduated credit, the attem"t must be to lift the "oor from one le#el to another so that they come out of "o#erty. Extent of Exclusion (SS) data re#eal that *+., million farmer households in the country -+..*/0, out of a total of 1,.2 million households do not access credit, either from institutional or non%institutional sources. Further, des"ite the #ast networ3 of ban3 branches, only 45/ of total farm households are indebted to formal sources -of which one%third also borrow from informal sources0. Farm households not accessing credit from formal sources as a "ro"ortion to total farm households is es"ecially high at ,+.,./, 1..46/ and 55.+,/ in the (orth 7astern, 7astern and Central Regions res"ecti#ely. Thus, a"art from the fact that e&clusion in general is large, it also #aries widely across regions, social grou"s and asset holdings. The "oorer the grou", the greater is the e&clusion. Demand Side Factors 8hile financial inclusion can be substantially enhanced by im"ro#ing the su""ly side or the deli#ery systems, it is also im"ortant to note that many regions, segments of the "o"ulation and sub%sectors of the economy ha#e a limited or wea3 demand for financial ser#ices. In order to im"ro#e their le#el of inclusion, demand side efforts need to be underta3en including im"ro#ing human and "hysical resource endowments, enhancing "roducti#ity, mitigating ris3 and strengthening mar3et lin3ages. 9owe#er, the "rimary focus of the Committee has been on im"ro#ing the deli#ery systems, both con#entional and inno#ati#e. National Mission on Financial Inclusion The Committee feels that the tas3 of financial inclusion must be ta3en u" in a mission mode as a financial inclusion "lan at the national le#el. ! (ational Mission on Financial Inclusion -(aMFI0 com"rising re"resentati#es from all sta3eholders may be constituted to aim at achie#ing uni#ersal financial inclusion within a s"ecific time frame. The Mission should be res"onsible for suggesting the o#erall "olicy changes re$uired for achie#ing the desired le#el of financial inclusion, and for su""orting a range of sta3eholders : in the domain of "ublic, "ri#ate and (;) sectors % in underta3ing "romotional initiati#es. ! (ational Rural Financial Inclusion <lan -(RFI<0 may be launched with a clear target to "ro#ide access to com"rehensi#e financial ser#ices, including credit, to atleast +=/ of financially e&cluded households, say ++.55 million by 4=.4 through rural>semi%urban branches of Commercial ?an3s and Regional Rural ?an3s . The remaining households, with such shifts as may occur in the rural>urban "o"ulation, ha#e to be co#ered by 4=.+. Semi%urban and rural branches of commercial ban3s and RR?s may set for themsel#es a minimum target of co#ering 4+= new culti#ator and non%culti#ator households "er branch "er annum, with an em"hasis on financing marginal farmers and "oor non%culti#ator households. Development and Technology Funds There is a cost in#ol#ed in this massi#e e&ercise of e&tending financial ser#ices to hitherto e&cluded segments of "o"ulation. Such costs may come down o#er a "eriod of time with the resultant business e&"ansion. 9owe#er, in the initial stages some funding su""ort is re$uired for "romotional and de#elo"mental initiati#es that will lead to better credit absor"tion ca"acity among the "oor and #ulnerable sections and for a""lication of technology for facilitating the mandated le#els of inclusion. The Committee has, therefore, "ro"osed the constitution of two funds with (!?!RD : the Financial Inclusion <romotion @ De#elo"ment Fund and the Financial Inclusion Technology Fund with an initial cor"us of Rs. +== crore each to be contributed in e$ual "ro"ortion by ;oI > R?I > (!?!RD. This recommendation has already been acce"ted by ;oI.

Business Correspondent Model 7&tending outreach on a scale en#isaged under (RFI< would be "ossible only by le#eraging technology to o"en u" channels beyond branch networ3. !do"tion of a""ro"riate technology would enable the branches to go where the customer is "resent instead of the other way round. This, howe#er, is in addition to e&tending traditional mode of ban3ing by targeted branch e&"ansion in identified districts. The ?usiness Facilitator>?usiness Corres"ondent -?F>?C0 models riding on a""ro"riate technology can deli#er this outreach and should form the core of the strategy for e&tending financial inclusion. The Committee has made some recommendations for rela&ation of norms for e&"anding the co#erage of ?F>?C. Altimately, ban3s should endea#our to ha#e a ?C touch "oint in each of the 6,==,=== #illages in the country. Procedural Changes <rocedural Changes li3e sim"lifying mortgage re$uirements, e&em"tion from Stam" Duty for loans to small and marginal farmers and "ro#iding agricultural > business de#elo"ment ser#ices in the farm and non%farm sectors res"ecti#ely, will hel" in e&tending financial inclusion. Role of RR?s RR?s, "ost%merger, re"resent a "owerful instrument for financial inclusion. Their outreach #is%B%#is other scheduled commercial ban3s "articularly in regions and across "o"ulation grou"s facing the brunt of financial e&clusion is im"ressi#e. RR?s account for 25/ of total rural offices of all scheduled commercial ban3s and ,./ of their wor3force is "osted in rural and semi%urban areas. They account for 2./ of de"osit accounts and 25/ of loan accounts in rural areas. RR?Cs ha#e a large "resence in regions mar3ed by financial e&clusion of a high order. They account for 2*/ of all branches in (orth%7astern, 2=/ in 7astern and 24/ in Central regions. )ut of the total 44.21 la3h S9;s credit lin3ed by the ban3ing industry as on 2. st March 4==6, 22/ of the lin3ages were by RR?s which is $uite im"ressi#e to say the least. Significantly the more bac3ward the region the greater is the share of RR?s which is am"ly demonstrated by their +6/ share in the (orth%7astern, *1/ in Central and *=/ in 7astern region. RR?s are, thus, the best suited #ehicles to widen and dee"en the "rocess of financial inclusion. 9owe#er, there has to be a firm reinforcement of the rural orientation of these institutions with a s"ecific mandate on financial inclusion. 8ith this end in #iew, the Committee has recommended that the "rocess of merger of RR?s should not "roceed beyond the le#el of s"onsor ban3 in each State. The Committee has also recommended the reca"italisation of RR?s with negati#e (et 8orth and widening of their networ3 to co#er all unban3ed #illages in the districts where they are o"erating, either by o"ening a branch or through the ?F>?C model in a time bound manner. Their area of o"eration may also be e&tended to co#er the 15 districts, "resently not co#ered by them. S ! " #an$ %in$age Scheme The S9; % ?an3 Din3age <rogramme can be regarded as the most "otent initiati#e since Inde"endence for deli#ering financial ser#ices to the "oor in a sustainable manner. The "rogramme has been growing ra"idly and the number of S9;s financed increased to 4,.4+ la3hs on 2. March 4==5. The s"read of the S9; % ?an3 Din3age <rogramme in different regions has been une#en with Southern States accounting for the major chun3 of credit lin3age. Many States with high incidence of "o#erty ha#e shown "oor "erformance under the "rogramme. (!?!RD has identified .2 States with large "o"ulation of the "oor, but e&hibiting low "erformance in im"lementation of the "rogramme. The ongoing efforts of (!?!RD to u"scale the "rogramme in the identified States need to be gi#en a fresh im"etus. The Committee has recommended that (!?!RD may o"en dedicated "roject offices in these .2 States for u"scaling the S9; % ?an3 Din3age <rogramme. The State ;o#ts. and (!?!RD may set aside s"ecific funds out of the budgetary su""ort and the Micro Finance De#elo"ment and 7$uity Fund -MFD7F0 res"ecti#ely for the "ur"ose of "romoting S9;s in regions with high le#els of e&clusion. For the (orth%7astern Region, there is a need to e#ol#e S9; models suited to the local conte&t of such areas. NGOs have played a commendable role in promoting SHGs and linking them with banks. NGOs being local initiators with their low resources are !inding it di!!icult to e"pand in other areas and regions. #here is there!ore a need to evolve an incentive package which should motivate these NGOs to diversi!y into other backward areas. The S9; % ?an3 Din3age <rogramme is now more than .+ years old. There are a large number of S9;s in the country which are well established in their sa#ings and credit o"erations. The members of such grou"s

want to e&"and and di#ersify their acti#ities with a #iew to attain economies of scale. Many of the grou"s are organising themsel#es into federations and other higher le#el structures. To achie#e this effecti#ely, resource centres can "lay a #ital role. Federations of S9;s at #illage and talu3 le#els ha#e certain ad#antages. Federations, if they emerge #oluntarily from amongst S9;s, can be encouraged. 9owe#er, the Committee feels that they cannot be entrusted with the financial intermediation function. Extending S ! " #an$ %in$age Scheme to &r'an (reas There are no clear estimates of the number of "eo"le in urban areas with no access to organi'ed financial ser#ices. This may be attributed, in "art at least, to the migratory nature of the urban "oor, com"rising mostly of migrants from the rural areas. 7#en money lenders often shy away from lending to urban "oor. The Committee has recommended amendment to (!?!RD !ct to enable it to "ro#ide micro finance ser#ices to the urban "oor. )oint %ia'ility !roups SHG$bank linkage has emerged as an e!!ective credit delivery channel to the poor clients. However there are segments within the poor such as share croppers%oral lessees%tenant !armers whose loan re&uirements are much larger but who have no collaterals to !it into the traditional !inancing approaches o! the banking system. #o service such clients 'oint (iability Groups )'(Gs* an upgradation o! SHG model could be an e!!ective way. N+B+,- had piloted a pro.ect !or !ormation and linking o! '(Gs during /001$02 in 3 States o! the country through 45 ,,Bs. Based on the encouraging response !rom the pro.ect a scheme !or !inancing '(Gs o! tenant !armers and oral lessees has also been evolved. #he Committee has recommended that adoption o! the '(Gs concept could be another e!!ective method !or purveying credit to mid$segment clients such as small !armers marginal !armers tenant !armers etc. and thereby reduce their dependence on in!ormal sources o! credit. Micro Finance Institutions * N#FCs Micro Finance Institutions -MFIs0 could "lay a significant role in facilitating inclusion, as they are uni$uely "ositioned in reaching out to the rural "oor. Many of them o"erate in a limited geogra"hical area, ha#e a greater understanding of the issues s"ecific to the rural "oor, enjoy greater acce"tability amongst the rural "oor and ha#e fle&ibility in o"erations "ro#iding a le#el of comfort to their clientele. The Committee has, therefore, recommended that greater legitimacy, accountability and trans"arency will not only enable MFIs to source ade$uate debt and e$uity funds, but also e#entually enable them to ta3e and use sa#ings as a low cost source for on%lending. There is a need to recogni'e a se"arate category of Micro finance : (on ?an3ing Finance Com"anies -MF: (?FCs0, without any rela&ation on start%u" ca"ital and subject to the regulatory "rescri"tions a""licable for (?FCs. Such MF%(?FCs could "ro#ide thrift, credit, micro%insurance, remittances and other financial ser#ices u" to a s"ecified amount to the "oor in rural, semi%urban and urban areas. Such MF%(?FCs may also be recogni'ed as ?usiness Corres"ondents of ban3s for "ro#iding only sa#ings and remittance ser#ices and also act as micro insurance agents. The Micro Financial Sector -De#elo"ment and Regulation0 ?ill, 4==5 has been introduced in <arliament in March 4==5. The Committee feels that the ?ill, when enacted, would hel" in "romoting orderly growth of microfinance sector in India. The Committee feels that MFIs registered under Section 4+ of Com"anies !ct, .,+6 can be brought under the "ur#iew of this ?ill while coo"erati#e societies can be ta3en out of the "ur#iew of the "ro"osed ?ill. +evitalising the Cooperative System Though the networ3 of commercial ban3s and RR?s has s"read ra"idly and they now ha#e nearly +=,=== rural>semi%urban branches, their reach in the countryside both in terms of the number of clients and accessibility to the small and marginal farmers and other "oorer segments is far less than that of coo"erati#es. In terms of number of agricultural credit accounts, the Short Term Coo"erati#e Credit System -STCCS0 has +=/ more accounts than the commercial ban3s and RR?s "ut together. )n an a#erage, there is one <!CS for e#ery 6 #illagesE these societies ha#e a total membershi" of more than .4= million rural "eo"le ma3ing it one of the largest rural financial systems in the world. 9owe#er, the health of a #ery large "ro"ortion of these rural credit coo"erati#es has deteriorated significantly. For the re#i#al of the STCCS, the Faidyanathan Committee Re"ort has suggested an im"lementable !ction <lan with substantial financial assistance. The im"lementation of the Re#i#al <ac3age would result in the

emergence of strong and robust coo"erati#es with conduci#e legal and institutional en#ironment for it to "ros"er. ! financially sound coo"erati#e structure can do wonders for financial inclusion gi#en its e&tensi#e outreach. Micro Insurance

Micro%insurance is a 3ey element in the financial ser#ices "ac3age for "eo"le at the bottom of the "yramid. The "oor face more ris3s than the well off. It is becoming increasingly clear that micro%insurance needs a further "ush and guidance from the Regulator as well as the ;o#ernment. The Committee concurs with the #iew that offering micro credit without micro%insurance is self%defeating. There is, therefore, a need to em"hasise lin3ing of micro credit with micro%insurance.
The country has mo#ed on to a higher growth trajectory. To sustain and accelerate the growth momentum, we ha#e to ensure increased "artici"ation of the economically wea3 segments of "o"ulation in the "rocess of economic growth. Financial inclusion of hitherto e&cluded segments of "o"ulation is a critical "art of this "rocess of inclusion. 8e ho"e that the recommendations made in this Re"ort, if im"lemented, will accelerate the "rocess of financial inclusion. #SC,SS,DN*-.,/0